Skip to main content
News

Benefits of a Cash Flow Forecast

By 06/01/2022June 29th, 2023No Comments
Direct Peak Cash Flow

There are so many plates to spin as a small business owner, but none is probably more important than cash flow as you can only run out of cash once. Read on to find out the benefits of cash flow forecasting.

In this article you’ll find out:

  • What is a cash flow forecast
  • The benefits of cash flow forecasting
  • How to build cash flow forecasts
  • How to leverage technology to automate cash flow forecasting.

Let’s go!

What is a cash flow forecast?

 

A cash flow forecast is a report that predicts your business’ bank balance over a set period. I would generally recommend that a business runs two types of cash flow forecasts:

  • 12-month forecast broken down into monthly periods
  • 13-week forecast broken down into weekly periods.

The 12-month cash flow forecast will give you a “big picture” overview of your company’s cash for annual planning.

The 13-week cash flow forecast gives you a much more detailed view of your cash and helps with immediate to short-term cash planning. – Download our FREE cash flow forecasting template

What are the benefits of cash flow forecasting?

 

1. You know if you have cash flow problems and are going to run out of cash

Effective cash flow forecasting can quickly identify if the business is going to have any cash shortages. This is vital for business planning as you will be able to put a plan in place to ensure you don’t have a negative cash flow.

A few actions that you may take if your cash flow forecasting shows you’re going to run out of cash:

  • Employ a better credit control system to ensure the accounts receivable are paid to credit terms increasing future cash flow
  • Arrange for some business finance to inject a cash inflow into your business
  • Speak to suppliers to see if you can temporarily agree to longer payment terms

Having this foresight could be vital to the survival of your business if cash is tight. Once you’re past this point, you can put in place a roadmap to ensure cash flow is never a problem again.

2. Make key decisions on allocating your cash surplus

Although it may seem rare that your business will have excess cash on hand, a cash flow projection will help you identify if this will be the case and when you will achieve it. As long as the cash flow forecasting is as accurate as possible you will also know roughly how much of a positive cash flow excess you have.

Once you have this information from your cash flow statement, you can make some key decisions on where to invest this money.

Here are a few actions you may wish to take on investing excess cash:

  • Repay outstanding loans from the balance sheet to save on the interest charges
  • Invest in business growth opportunities
  • Issue dividends to shareholders.

Whatever you decide to invest your excess cash in, just remember to update this information in your cash flow forecasting, so you can see the long-term impact on the business cash position.

3. Use cash flow forecasting to create additional “What if” scenarios

If you have some ideas for the business to take a new direction, it is key to create a “what if” scenario as part of your cash forecasting so you know exactly how much working capital you have.

Here are some ideas of what you may use as a “what if” scenario for when cash forecasting:

  • Taking on additional employees
  • Investing in new premises
  • Sale or purchase of an asset
  • Adding a new service or product that requires a sales forecast

You will want to create a duplicate of your original cash flow forecast and add in all the impacts that this new direction will create. You can then compare the original scenario with the “what if” scenario to see how your cash will be affected.

4. Track your spending and if it’s in line with your expectations

When you are constantly updating or reviewing your cash flow forecast, you will get a good handle on your cash outflows.

It’s very easy in this digital age to get disconnected from your company’s cash flow, especially as your business grows and the number of bank transactions increases.

Below are a few insights forecasting cash flow will provide you:

  • Unnecessary overspend on costs
  • Any large irregular cash payment
  • Price increases from suppliers

Getting these insights quickly allows you to keep your finger on the pulse and make changes quickly to ensure the company’s net income remains healthy.

5. Manage late payers

Late payers are one of the biggest reasons for actual cash being behind the plan of the cash flow forecast. In an ideal world, all your customers would pay to credit terms, but unfortunately, this is rarely the case.

A key benefit of cash forecasting is that you will quickly know who is your consistent late payers and you can plan for this.

Below are a few actions you can take to deal with late payers:

  • Implement penalties for late payments
  • Implement incentives to pay early, such as a settlement discount
  • Reduce their credit limit or credit terms

If you have certain customers which continually pay late, remember to adjust your cash flow to line up when you really will get the cash from them, so the cashflow forecast is as accurate as possible.

How to build cash flow forecasts

 

The starting point for building your cashflow forecast is the same for either your 12-month forecast or your 13-week forecast. Below is a list of the things you need to get started:

  • The closing bank balance of the day before the start of your cash flow forecast
  • A spreadsheet tool to build the forecast in, I would recommend either Google Sheets or Microsoft Excel
  • Details of all your regular payments in and out
  • A list of current money that is owed to you and when it’s due
  • A list of current money you owe and when it’s due.

I would then lay out your cash flow in the following way:

Period (week/month) P1 P2 P3 Etc.
Opening Bank Balance £5,000 £1,200 £3,900 etc.
Cash Receipts (Cash inflow) £2,700 £4,300 £7,900 etc.
Cash Expenses (Cash outflow) £6,500 £1,600 £3,200 etc.
Net Cash Flow -£3,800 £2,700 £4,700 etc.
Closing Balance (Bank account) £1,200 £3,900 £8,600 etc.

 

As you can see, you get a very quick overview of where your closing cash balance will be for each period in this summary cash flow. It is highly recommended that behind the summary, you have a more detailed list of cash receipts and cash expenses.

Here are a few examples of cash inflows:

  • Sales
  • Debtors (money owed from prior customer sales)
  • Grant income
  • Loans.

And a few examples of cash outflows:

  • Purchases
  • Rent
  • Wages
  • Taxes.

Your lists are likely to be much longer than this and nothing must be missed to ensure the cash flow forecast is as accurate as possible.

One final tip is to make sure the cash flow forecast is updated at the start of each new period to make sure the forecast is rolling. For example, your 13-week forecast should be updated every week, ideally on the first working day of the week, so you have clear cash flow management.

Want a head start?

Download Cash Flow Forecast Template

Looking for business accountancy services

How to leverage technology to automate cash flow forecasting.

 

Keeping a cash flow forecast up to date in a spreadsheet can be a lot of manual work, so it may be worth looking at an app to do this for you.

If you are using cloud accounting software such as Xero, you can easily integrate this with third-party apps to generate a cash flow forecast automatically.


Here are a few apps you can look at:

Once you have a cash flow forecasting tool integrated with your cloud accounting software, it’s essential to make sure that your books are as up-to-date as possible to ensure accuracy.

You can then use the third-party app to make tweaks to the forecast as you will know that the software won’t know, such as payment plans you have just agreed on, planned new expenditures and late payment dates from conversations with customers.

Next steps

 

As you can see there are many benefits to cashflow forecasting and it’s an essential tool every business owner should have. I hope you found this article helpful for implementing a cash flow forecast into your business.

Which forecasting option will you choose for your business?

Do you need any additional help with getting your accurate cash flow forecast together? – Download our FREE cash flow forecasting template.

Let me know by getting in touch below or check out our accounting services😀

    Steve Marshall
    Steve Marshall
    2023-08-01
    The whole team at Direct Peak have been amazing to work with. Everything we have been looking for from an accountant. Thank you from Acoustic Associates
    Luke Tyler
    Luke Tyler
    2023-06-20
    The Direct Peak team are exceptional in all they do. They demystify my questions on accounting, offer clear, sound advice, and help me to make informed decisions about my business.
    Don Wiid
    Don Wiid
    2023-05-10
    Karl Newman and his team help us with our Xero accounts system, making sure it is accurate and up to date. The real value though, is Karl's experience as a management accountant, providing indispensable advice on a monthly basis to ensure we keep growing.
    Craig Sawyer
    Craig Sawyer
    2023-03-09
    Direct Peak are the perfect accountants for me. Always helpful and friendly. They take away any of my accountancy headaches which allows me the time to focus on my business. Would highly recommend them and do to any business owners I can. Thank you all !
    Kelsey Brace
    Kelsey Brace
    2023-02-20
    I've worked with Karl & Direct Peak for years. They have always provided great service and advice. Highly recommeded!
    Sana Hanassi-Savari
    Sana Hanassi-Savari
    2023-02-10
    Great service, I would highly recommend them. The team are friendly, always around to help and very knowledgable.
    Simply Antivirus
    Simply Antivirus
    2022-10-11
    Direct Peak was the right choice for us. Outstanding friendly service. The team are highly knowledgeable regarding tax and financial matters, and they have been an asset to the running of our business. Very approachable and have an answer to all my questions. Highly recommend them! Very well done guys!
    catherine Johnson
    catherine Johnson
    2022-10-11
    I recently changed my Accounting to Direct Peak, mainly due to Karls brilliant support with advice regarding making Tax Digital and around my business growth intentions. Having run my own small business and being with my previous accountant for 13 years, I have been SUPER impressed with every aspect of the move - the advice, the support, and mostly the friendliness of the team and their willingness to want to help. Eve has been so amazing at supporting me to make the transition to Digital VAT returns - I cannot recommend Karl and his team at Direct Peak highly enough - Thanks Guys!
    Peter Baker
    Peter Baker
    2022-09-21
    Karl has been outstandingly patient and generous with his time. I cannot recommended Karl enough. He has helped massively in starting up my own company.
    Click Here

    Dedicated Contact

    Direct Peak provides a dedicated business tax accountant, who will prepare your annual accounts and tax returns. They will be on hand to answer any tax queries you have.

    Click Here

    Tax Efficient

    Your business tax accountant will ensure that the company is set up in the most tax-efficient way and that you are claiming for all the correct expenses to maximise your earnings.

    Click Here

    Quick Turnaround

    We aim to turn around the annual accounts and tax returns quickly to give you visibility of your tax bill well in advance of it being due.

    Close Menu